a) The largest group of buyers in the financial category are private equity (PE) firms. Twenty years ago, this was a very small segment of the buyer category. Now there are an estimated 4,000 PE firms throughout North America.
These PE firms have over $1.5 trillion of “dry powder” (financial assets) that they need to put to work. With the current low-interest rates, investors continue to pour money into PE firms as they have and tend to out-performed most other investment options.
How does a PE firm work? A PE firm goes out to potential investors to raise a fund. These investors are high-net-worth families, from individuals, or they may go to institutions, pension funds, large banks, insurance companies, etc., who provide the funds
Once the money is raised, the PE firm typically has 10 years to find companies, purchase them, grow them, and sell them again. Thus, most hold times are around five years, some a little more and some a little less. PE firms may be motivated to pay more for a business to hit their investment timeframe, are looking for a good management team, and may required an owner to remain for a longer period of time.
b) Family offices are similar to PE firms, but usually has more flexibility. A family office typically invests the funds from one high net worth family (generally with $200+ million net worth).
Typically, family offices have “patient capital,” meaning they do not have to sell the company within a certain predetermined window of time. Additionally, they do not have a set mandate to put capital to work by a certain date or deadline. Thus even if they like a deal, if several buyers are bidding it up, they may back out because they do not need to get their funds invested quickly.
PE firms and family offices are most likely to offer the seller an ongoing equity stake in the business. This allows sellers to take advantage of future growth and get a second payday when the business is resold.
c) A search fund is often an investor-backed individual looking for a company to buy. These individuals will manage the company with the goal of providing a financial return for themselves and their investors.
One of the downsides of a search fund financial buyer, is that their investor team has the funding and has the final say. Simply said, you get to the Letter of Intent (LOI) stage with a search fund, you often have to “resell” the deal to their investor team. When identifying and narrowing your buyer pool, you need to be careful that a search fund buyer really does have their investors on board.